Introduction
Forex trading has its own language, and understanding the key terms is essential before you start trading. Here’s a simple guide to the most important forex trading terms that every beginner should know.
1. Currency Pair
In forex, currencies are always traded in pairs. For example, EUR/USD (Euro vs. US Dollar) or GBP/JPY (British Pound vs. Japanese Yen). The first currency is the base currency, and the second is the quote currency.
2. Bid and Ask Price
- Bid Price – The price at which you can sell a currency pair.
- Ask Price – The price at which you can buy a currency pair. The difference between these two prices is called the spread.
3. Spread
The spread is the difference between the bid price and the ask price. It is the cost you pay to enter a trade. Lower spreads mean lower trading costs.
4. Pips
A pip (percentage in point) is the smallest price movement in forex trading. For most currency pairs, one pip is 0.0001 (except for JPY pairs, where it is 0.01).
5. Lot Size
A lot is the amount of currency you trade. There are three common lot sizes:
- Standard lot – 100,000 units of currency.
- Mini lot – 10,000 units of currency.
- Micro lot – 1,000 units of currency.
6. Leverage
Leverage allows traders to control large positions with a small amount of money. For example, with 1:100 leverage, you can control $10,000 in trades with just $100 in your account. However, leverage increases both profits and risks.
7. Margin
Margin is the amount of money you need to open a trade. If you use leverage, only a small portion of your own funds is required, but you must maintain a minimum margin level to avoid losing your trade.
8. Stop-Loss Order
A stop-loss is an order placed to automatically close a trade when the price reaches a certain level. This helps to limit losses and protect your capital.
9. Take-Profit Order
A take-profit order automatically closes a trade when a certain profit level is reached, helping you secure your gains.
10. Forex Broker
A forex broker is a company that provides traders access to the forex market. They offer platforms for buying and selling currencies and charge a spread or commission.
Conclusion
Understanding these key forex terms will help you navigate the forex market with confidence. The next step is learning how currency pairs move and why they change in value.